Markets in Turkey are currently focused on the August inflation data release set to be announced on September 3 by Turkish statistics institute TUIK. There are unanimous expectations that a sharp rise from July’s reading of 15.85% will be revealed.

A poll of 17 institutions conducted by BloombergHT showed respondents on August 31 predicting on average that CPI inflation hit 18.19% in August. The forecast range was between 16.9% and 18.71%.

Meanwhile, Capital Economics expects the data to show that inflation jumped to a fresh 15-year high of around 21.5% y/y in August, analyst Jason Tuvey said on August 31 in a research note.

“Turkish CPI figures due on Monday are likely to show that inflation rose to its highest level since 2003, but government pressure means that this is unlikely to prompt the central bank to hike interest rates,” Tuvey said.

Capital Economics sees little chance that an ugly set of inflation figures will change the government’s – and, crucially, President Recep Tayyip Erdogan’s – stance on interest rates. “Even if the CBRT [central bank] is allowed to act, rate hikes would probably be limited to 100-200bp – far from the 700-1,000bp that the markets want to see,” Tuvey concluded.

Capital Economics forecasts end-2018 inflation will be 17% while it expects the central bank’s main policy rate to stay at 17.75%.

The CBRT's weighted average cost of funding reached 19.25% on August 20 and it remained at that level through August 29, according to the latest data from the monetary authority.

As an unorthodox behind the scenes response to the recent exchange rate shock, the central bank started pushing lenders to borrow at its overnight borrowing rate of 19.25% starting from August 10. The authority has only been providing funding through the overnight borrowing window since August 20.

With a plain interest rate hike in full view seemingly off the table unless Erdogan shifts his unorthodox position on rate-setting amid an overheating economy, the central bank is expected to employ its late liquidity window rate of 20.75% as its next step to get around government resistance to monetary tightening.